GBP/EUR – Drop in UK Inflation Increases Odds of BoE Action
Support for the Pound weakened as the headline UK consumer price index fell to its lowest level in more than three and a half years, lower than forecast.
The year-on-year inflation rate plunged to 0.8% from 1.5% in March, causing markets to further speculate that the Bank of England (BoE) could loosen monetary policy again in the months ahead.
BoE Chief Economist Andy Haldane had noted already that the central bank is assessing the possibility of negative interest rates, which weighed heavily on GBP exchange rates.
Another sharp monthly fall in UK retail sales for April could see the Pound shedding further ground ahead of the weekend, given that consumer spending has previously helped to shore up economic activity.
GBP/USD – Pound Support Limited after UK GDP Contraction
Worries over the health of the UK economy persisted as the first quarter GDP showed a sharp quarterly contraction of -2.0%.
While the decline was slightly smaller than forecast, this was not enough to prevent GBP exchange rates weakening, especially in the face of fresh market anxiety over Brexit.
With the UK still looking on track to end the current transition period without a deal in place, the possibility of more economic disruption cast a shadow over the Pound.
Further weakness could be in store for GBP exchange rates on the back of the UK’s May PMIs this week.
Even though forecasts point towards a modest improvement on the month, if the PMIs remain in contraction territory the potential for Pound gains appears limited.
USD/GBP – Threat of Fresh US-China Trade Spat Boosts US Dollar
The US Dollar benefitted from a general uptick in safe-haven demand, driven by fears of a greater economic disruption as the US threatened to impose fresh tariffs on China.
Even so, USD exchange rates ultimately struggled to hold onto their positive footing for long due to comments from Fed Chair Jerome Powell.
Although Powell had previously ruled out the prospect of negative interest rates, he noted that the central bank has further ammunition, leaving the US Dollar exposed to selling pressure.
If the Federal Open Market Committee’s (FOMC) latest set of meeting minutes also show signs of dovishness, this could prompt further USD exchange rate losses.
On the other hand, an improvement in the Philadelphia Fed manufacturing index may help to offer the US Dollar a leg up against its rivals in the near term.
EUR/USD – Early German Recession Fails to Drag on Euro
Markets were caught off guard as a downward revision to the fourth quarter German GDP pushed the country into a state of recession.
Confirmation the German economy was already losing momentum even before the impact of the Covid-19 crisis put a dampener on the outlook for the wider Eurozone.
However, this was not enough to drag EUR exchange rates significantly lower ahead of the weekend as global trade anxiety picked up.
Confidence in the health of the Eurozone could take a fresh blow this week if May’s manufacturing and services PMIs fail to impress.
Unless the PMIs show that the slowdown has bottomed out, recovering some of their lost ground, the mood towards the Euro looks set to sour.